Charting How Much Home the Median Income can Afford

I wonder what the chart would look like if you graphed out, from 2000 to present, the price someone could afford to buy with the given interest rate at the time (from the graph above), with payments equal to 28% of the median household income at the time. How closely would that correlate to the median price graph? Tim is this something you could pull together?

I can’t resist a request for a new chart, so here you go:

The results probably won’t be too surprising to anyone who has been following the housing bubble for some time. The whole reason that it was a bubble was because home prices got way out of whack with the fundamentals.

Note that the blue dot on the median price line in the above chart indicates the month that I launched Seattle Bubble, saying that “I do believe there is a speculative bubble in real estate right now.”

While we were making good progress toward a complete correction in home prices from 2007 through early 2009, last year’s massive government intervention seems to have delayed the full return to rational pricing by a bit. The last point on the “Affordable Home Price” line is at $325,000, while the most recent median price was $375,000.

As a complement to the above chart, here’s an updated look at the affordability index for King County:

We just barely touched 100.0 on the index in March of last year before all of the government “assistance” drove home prices back into more unaffordable territory.

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

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32 comments:

Your charts are good, don’t get me wrong, but what avg medium household income was used?

IMO, the charts used the “hyped up” mainstream media avg household income that includes larger packs of gypsies per household, due to the repression causing more cohabitation lately, and also averaged in the top 5% of incomes that are totally disproportionately “out of whack” with 98% of the home purchasing households’ wage increases the last few decades. Both of these statistical anomalies makes “affordability” using your graphs a statistical exercise in math, rather than a common sense evaluation of what the real avg household can actually afford with 1.2 incomes and approx $17/hr per capita worker avg pay.

Let me work the numbers:

(17)(2088)(1.2)= $42.6K

x 28%= $11.9K

or about $1000/mo for mortgage payments:

sounds more in the $150K range for an avg pre-approved loan.

Hades, both the elite Dem/Reps like to say $250K/yr is “Middle Income”…..LOL….dream on.

Whoa- looks like we had a bit of a bubble there! And it looks like we still have one. The new question is: as incomes continue to fall will home prices ever be able to catch up? At the very minimum it looks like homes have another 15% to fall before matching historical levels of affordability.

Other silent killers that the chart does not show is how inflation of other household necessities and the cost to the household to service their non-RE debt (e.g. credit card payments) has changed over that time. Those things can affect how practical it is for a household to apply 28% of their income (or more) to housing.

Another is an equity/savings killer. Many households have lost equity in their current homes or have lost part of their stock & savings accounts between 2005-2010. This makes them less able to buy down the debt on the new house; in other words, they must support their offering price with the pledge of 28% of their future income, as opposed to a combination of that plus a big down payment.

It’s a fantastic chart in its own right, and I wonder if these other effects could somehow be included in an even more robust one.

The Affordable Home Price index is *great*, and I hope you run it every month until after we’ve clearly bottomed. It may well *indicate* the bottom. (this method could be tested on other cities that may have already bottomed)

Yeah, it looks like there’s 12-15% left to fall, which feels about right.

Agreed- given the economy and current attitudes toward housing as a (failed) investment I’d certainly expect an over correction, perhaps quite a significant one.

I’m afraid attitudes have barely changed towards home as an investment. People bought bigger and bigger homes, building what I called “excess capacity”. That trend hasn’t changed yet. People are still buying large homes and borrowing 80+%, sometimes even close to 97%, to buy beyond their means. I’ll believe the “attitudes are changing” meme when I see people paying at least 50% down and the average home size starts to shrink. There is no need to have excess capacity in a home — by excess capacity I mean having rarely used extra bedrooms, dedicated rooms (den, media, formal etc) that are little used, and having huge lawns that take lots of time, water, and fertilizer to maintain.

We just had a great opportunity for people to realize that they should downsize, but as far as I can tell, the only people downsizing are those who are forced into it.

Nice chart. Since you’re taking requests, I’d love to see this using the 75th percentile of income rather than the 50th. The bottom 25% of income earners are not in the real estate market and can skew the results.

This chart shows the median, top 20%, and top 5% of incomes for various WA counties. Notice that the median for King and Snohomish counties are pretty close, but the income of the top 20% in King County is about 1/3 higher. The top 5% is 50% higher in King County.

RE:DrShort @ 9 – If you know of a place where I can find that breakdown of data on a yearly basis from the early ’90s through at least 2009, I’d love to put together another version of the chart. Unfortunately a single data point from 2006 doesn’t really do me much good.

I’ll believe the “attitudes are changing” meme when I see people paying at least 50% down

What I learned from this recession is that in uncertain times, you should pay as little down as humanly possible. It’s like letting the bank pay for a super-version of home insurance. If the house burns down, falls in an earthquake, or even plummets in value, you can just walk and let the bank pay for it. Not much down means not much skin in the game.

I still think we can’t even discuss a bottom without agreeing on a definition of one. My definition is that a bottom = a point that is not more than 5% higher than the ensuing 7 years of median prices.

RE:DrShort @ 9 – If you know of a place where I can find that breakdown of data on a yearly basis from the early ’90s through at least 2009, I’d love to put together another version of the chart. Unfortunately a single data point from 2006 doesn’t really do me much good.

Yeah, I’ve looked and haven’t been able to find a good dataset for it either.

Nice chart. Since you’re taking requests, I’d love to see this using the 75th percentile of income rather than the 50th. The bottom 25% of income earners are not in the real estate market and can skew the results.

I would argue that effectively they are in the market: As renters. Their income will affect peoples decision to buy a secondary home as a rental. I would even argue that not considering them will skew the results and I would expect historic correlations to get worse.

I’ll believe the “attitudes are changing” meme when I see people paying at least 50% down

What I learned from this recession is that in uncertain times, you should pay as little down as humanly possible. It’s like letting the bank pay for a super-version of home insurance. If the house burns down, falls in an earthquake, or even plummets in value, you can just walk and let the bank pay for it. Not much down means not much skin in the game.

You might start that way, but at some point you have enough equity in your home, right? And if you have savings to pay a big down payment, why not reduce your debt service and use the savings to buy insurance? You know you have to buy insurance even if you put little down, right?

And then there is the question of how you can invest your savings to get a better return than the interest you are paying the bank. Ten years ago people thought it was easy to invest in the stock market and get a steady 10% annual return. Yeah right! People have to be savvy enough and know what to do with their savings. If they can do that, they can treat the mortgage as a strategic loan so they can use their savings to get higher returns in their business or other place where they can get a good return.

Hi Tim — What is your assumption as to down-payment percentage when you plug in your 28% vs. median house price? The people I know who were buying around 2000-2002 were putting down 20% or more, which as we know was not so much the case a few years later. So per #8 above, I am inclined to think that under the same down-payment assumption, for the last few years the Affordability benchmark is on the high side.

I could be missing something here and hope that if I am, someone will point it out to me.

RE:Civil Servant @ 16 – Just like in the Affordability Index calculation, the first chart above assumes 20% down. So yes, it is probably an overly generous measure of “Affordable Home Price” for the recent years of 80/20, zero-down or 3.5%-down FHA loans.

DrShort, you are delusional. Prices are still far too high and will come down at least another 25% if not more. Time to get out of the RE business. It is a broken model.

The 20% down model is an impossible one for almost all buyers at this point. It will become the norm again when the average 3bd/2bath in Seattle is once again around or below $200K.

Also, paying 25% – 30% of your income (net or gross) for a mortgage is, historically, ludicrous and bad for our consumer economy. People cannot afford to spend and keep our economy going with such high debt.

Ignoring inflation, and assuming interest rates will not go down any further, the equilibrium price should be lower than the intersection of the two lines on that chart.

Declines in asset prices have at least two effects which cause incomes to decline. First, people feel poorer and spend less as a result. In economics this is called the wealth effect. Reduced spending leads to unemployment/lower incomes. In addition, the labor supply increases as people who desire to maintain their bubble standard of living re-enter the work force, increase their hours, or delay their retirement. This tends to reduce wages. In addition it also reduces investment in the short-run as an older labor force (you may have noticed that the lower the age the higher the unemployment rate) requires less investment (they’ve already been doing the job).

I would also say that a lot of the cheaper houses have serious deferred maintenance. So the true price you are paying can be higher than the one recorded at sale.

Awesome chart. Thanks Tim for compiling the data. Its interesting how right around 2004 the affordable home price flat-lined. I wonder what caused that change from a steady increase in affordability to effectively zero increase. Was it interest rates not falling anymore? Was it incomes not rising anymore? Maybe some combo of the two?

Ironic how the affordability flat-lining happened right about the same time as prices sky-rocketing. Sounds like a perfect storm.

Mostly agree. I see inflation with global commodities as the dollar weakens over time, but there is no way real estate stays at current levels. The demand side of supply/demand is simply not there. We’ve already brought forward the demand via the stimulus, and most americans don’t qualify for the tighter lending standards.

Unless we have a stimulus that gets in the hands of ‘middle america’, there is simply no saving the real estate market from significant further retracement as income and prices still do not match up. When all is said and one, I think we will have fallen at least 50% from the bubble highs.

I have never been more concerned than I am right now as the govt stimulus has run its course, the people have been lied to, and now we face the reality of the situation. Plus, the stock market bull market has broken from a technical standpoint and I expect a significant pull back as we truly begin to unwind.

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